Declining cash flows at several big office landlords might be the next big worry for embattled office properties.
Office landlords largely benefited from long-term tenant leases in place when the pandemic took hold in early 2020, but cash flows lately have begun to erode as more tenants downsize their office space as hybrid work looks to retains a foothold in the market.
The gloomy backdrop now includes a more than 10% drop in a key profitability metric for several office property landlords in the past year, stirring “cause for concern,” for the REITs and the broader office market, according to Barclays Research.
With first-quarter corporate earnings reports wrapping up, Barclays Researchers found net operating income (NOI) declined at half of 18 public real-estate investment trusts (REITs) focused on office buildings, in the past year, with a more than 10% drop at three landlords.
Franklin Street Properties Corp.,
FSP,
which has office buildings in Denver, Dallas and Houston, reported the biggest pullback of the bunch with a 12.8% NOI decline. The D.C.-area focused JBG Smith
JBGS,
and Empire State Realty
ESRT,
which owns the Empire State Building in New York City, each reported a roughly 11% drop.
“These three reported that NOI fell more than 10% over the past year, giving cause for concern, both the for these specific REITs and for the broader office sector,” Lea Overby’s credit research team, wrote in a Wednesday client note.
Of note, NOI at Empire State Realty’s Manhattan office buildings was less negative, at -7% in the past year, the company said.
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Requests for comment to Franklin Street and JBG Smith weren’t immediately returned.
Commercial properties rely on cash flows, often in the form of rent from tenants, to produce income for landlords. Net operating income broadly measures a property’s income, minus repairs and other operating expenses.
Declines in profitability make it harder for buildings to obtain financing. The pullback in NOI comes as credit already tightened significantly as interest rates increased at the fastest clip in decades and as many lenders have grown skittish about financing office buildings in big cities that face lost revenue from half-empty properties.
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U.S. stocks closed mostly higher in choppy trade Wednesday, after a gauge of U.S. consumer price inflation dipped below 5% for the first time in two years. The Dow Jones Industrial Average
DJIA,
shed 30 points, or 0.1%, while the S&P 500 index
SPX,
booked at 0.5% gain at 4,137, according to FactSet.
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